June 14, 2013

Supplier Diversity & Small Business Demystified (Part 2 of 2)

In the last post, I spoke of the incentive for diversity initiatives, and a sample system blueprint. Though there is significant overlap in some areas, Small Business initiatives do differ in motivation and requirements. Here I will provide a high-level overview of small business, and a vision for more efficient self-certification affidavit collection and reporting.

Small Business Overview

According to the U.S. Small Business Administration (SBA), there are 23 million small businesses in the United States, which account for 54% of all U.S. sales and 55% of all jobs.

In order to increase economic development, volunteer usage of small businesses was modified to mandated, or “required”. Section 8(d) of the Small Business Act (15 USC 637(d)) and FAR 52.219-8 requires that small businesses, small disadvantaged businesses, HUBZone small businesses, woman-owned small businesses, veteran-owned small businesses, and service-disabled veteran-owned small businesses have maximum practicable opportunity to participate as subcontractors under federal contracts, to the extent that such opportunity is consistent with efficient contract performance.

As such, other-than-small businesses (OTSB), in order to be compliant with federal guidelines, when under a federal contract (whether prime supplier, or government grant) exceeding $550,000 ($1,000,000 for construction of a public facility), must comply with their subcontracting plan, as required by the government and negotiated per contract. Being out of compliance could quickly lead to loss of contract and/or liquidated damages.

This subcontracting plan includes items such as:

  1. Percentage goal for each small business category
  2. The name and description of duties for the Small Business Liaison Officer (SBLO)
  3. A description of the efforts that the company will make to ensure that all small businesses will have an equitable opportunity to compete for subcontracts
  4. Assurances that the company will flow down the subcontracting requirements to its subcontractors
  5. Assurances that the company will cooperate in any studies and submit periodic ISR/SSR reports (previously “SF 294” and “SF 295” respectively)
  6. A recitation of the types of records the company will maintain to demonstrate its compliance.

Per point #4: for any other-than-small subcontractors to that prime, with contracts over $550,000 ($1,000,000 for construction) must adopt the same plan as the prime (goals by category of small business). The subcontractor is then responsible for submitting their ISR report(s) to their prime contractor (or immediate higher tier), or submitting their SSR reports(s) directly to the government. This requirement is often referred to as the subcontractor flow-down, and given the typical size of the U.S. government’s prime contractors (and even their Tier-1s), this provision was also put in place to ensure that small businesses receive the “maximum practicable opportunity” to earn government contracts and subcontracts. One can quickly see, however, how quickly the web of suppliers and subcontracting plans grows.

Each prime contractor designates a Small Business Liaison Officer (often several) that holds responsibility for:

  • Insuring their organization utilizes their “best effort” to meet their goals by category;
  • Gathering self-certifying affidavits for each qualified supplier; and,
  • ISR/SSR Reporting, whether directly into the Electronic Subcontract Reporting System (eSRS), or other as dictated by the branch of government.

Note: Again, as each contract may have differing percentage goals for each small business category, these tasks may repeat itself for each specific contract – and, regularly, oversight bodies, such as the Defense Contract Management Agency (DCMA) will audit the results, as well as provide guidance on how to improve their ”best faith efforts”.

As if the task was that simple…

Previously, organizations could utilize SBA Pro-Net as an authoritative source of suppliers that are certified 8(a), HUBZone, and/or disadvantaged. This, has since, been integrated into the DOD’s Central Contractor Registration (CCR) and superseded by the Small Business Source System (SBSS).

Small business concerns, however, are not always straightforward in determining their qualifications (see: http://www.sba.gov/content/table-small-business-size-standards). The determination of a small business is determined by the North American Industry Classification System (NAICS) code – and the measurement varies. For example, a Plastics Material and Resin Manufacturer (NAICS: 325211) is deemed small if they have 750 or fewer employees, where a Synthetic Rubber Manufacturer (NAICS: 325212) is deemed small is they have 1,000 or fewer employees. Further, many categories are determined by revenue, or other (e.g., General Freight Trucking is $25.5 million in revenue). This means that the same supplier may be considered small for some materials procured, and not for others. As well, year-over-year suppliers may meet the small business requirement, or not, depending on their growth.

As such, the SBSS cannot sufficiently meet the self-representation requirement mandated by the federal government, in which each supplier provides a self-certification affidavit, by commodity, representing their qualification of meeting the guidelines – and, to further the pain for the SBLO, not only are they seeking the needle in the haystack, but now they are often trying to get small businesses to provide documentation, when they do not necessarily see the value in having to do it.

The Small-Business Portal Blueprint

What if…

An organization utilized the same “diversity” form, as was discussed yesterday, and…

  • Suppliers included, upon onboarding, items, such as HUBZone; and,
  • Suppliers can provide certifying agency (e.g., SBSS for HUBZone); and,
  • Suppliers are also asked for “revenue” and “employees”; and,
  • Spend by supplier, by NAICS is integrated into the supplier profile (note: may not be able to get directly from supplier, if they have more than one NAICS code they provide your organization); and,
  • The Table of Small Business Size Standards directly referred to, by supplier, to identify potential small businesses; and,
  • Upon identifying a potential small business, an email was sent to them asking them to download their pre-populated self-certification affidavit, certifying the commodity provided and revenue/employee size match; and,
  • The supplier can upload all applicable affidavits; and,
  • The SBLO can track progress of coverage, as well as quickly report only on those that have met the self-representation requirement; and,
  • On a periodical basis, this process repeats itself to ensure the most accurate representations, so the SBLO can transition from trying to find the “needle in the haystack” to “management by exception”?

I have heard horror stories about how burdensome the “old way” is (hope a data scrub can identify some small businesses, send letters to tens of thousands of companies, hope that you find one that will provide an affidavit, etc.) – but with a little supplier input on a regular basis, and with some very simple spend classification, one can see an easier way. As such, I look forward to thoughts and comments from those that have endured this unnecessary burden (and have lived to tell about it).

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